Today I’ll be taking a closer look at global mining giant Rio Tinto (LSE: RIO), and asking whether last week’s major news announcement could be a catalyst for significant share price growth for this FTSE 100 blue-chip.
Mongolian adventure
The Anglo-Australian miner revealed on Friday that along with its partners, the Mongolian government and Turquoise Hill Resources, it has approved the next stage in the development of the world-class Oyu Tolgoi copper and gold mine in Mongolia. The development of the underground mine will start later this year following the approval of a $5.3bn investment by the partners, and the recent granting of all necessary permits. First production however isn’t expected until 2020.
It’s anticipated that the underground mine will have a copper grade 1.66%, three times superior to that of the existing open pit. Oyu Tolgoi is expected to produce more than 500,000 tonnes of copper a year, compared with the current 175,000-200,000 tonnes, but that won’t happen until 2027 when the underground mine is fully ramped up. There should also be benefits from significant gold by-products, with an average gold grade of 0.35 grams per tonne.
The existing open-pit mine at Oyu Tolgoi was completed in less than two years, and on schedule, with 440,000 tonnes of copper having been sold since production began in 2013. 95% of the 3,000 strong workforce is Mongolian, and with over $1.4bn in taxes, fees and other payments having been paid to the Mongolian government, the project has certainly benefitted the local economy.
Time to buy?
No doubt the underground mine expansion is an exciting project and will be a great asset to Rio, the Mongolian government and its people over the long term. But with production not due to be fully ramped up until 2027, Rio’s bottom line won’t get the extra boost it needs for quite some time. If there are any problems with the expansion project, it will mean extra delays and extra costs, and investors might not see the benefits for a few decades!
Rio’s shares have performed well since the start of the year, gaining 14% during the last three months alone, but are still 33% lower than a year ago. With regards to the medium-term outlook, I feel the shares are still too expensive at present levels, trading on 21 times forecast earnings for this year, falling to 18 for the year ending December 2017.
Rio’s fortunes are of course highly geared to the price of commodities, but present estimates suggest to me that the shares are overvalued and too risky for growth investors uncomfortable with higher levels of risk. Furthermore, I think income seekers could also find better rewards elsewhere as the dividend yields are no better than average for a FTSE 100 blue-chip.
